Hands-off Investing – Mutual Funds and Exchange Traded Funds

For someone looking to invest money with a hands-off approach and willing to take some a risk, mutual funds could be the perfect solution. Mutual funds are a group of investments. Someone who manages these investments gets multiple investors and then invests their money in the stock market, bonds and securities.

As the value of stocks increase, dividends are paid and bonds mature, these profits are divided among the investors. Or if your mutual fund value overall increases, you can sell it for a profit as well. Once profits are determined, you can receive a check or you can reinvest your profits to grow your mutual fund portfolio.

Mutual funds, like money market funds, are tied to a net-asset-value (NAV). This means the value of the mutual funds minus liabilities. The NAV is determined at the end of each trading day to give the mutual fund its actual value.

There are some advantages to investing in a mutual fund. First, a manager handles your investing. This is a professional that is supposed to know the best way to invest the money – so you don’t have to worry about researching and figuring out what bonds are best or which stocks are expected to rise, etc. Mutual funds also give you a diversified portfolio. This helps reduce your investment risk by spreading out the money you’ve invested. That way if one stock falls or a certain bond loses value, your losses are minimized.

There are also some disadvantages to consider as well. There are costs involved. You will have to pay your investment manager and there are hidden costs and fees that can eat up profits. Another cost of mutual funds is the tax may have to pay on your profits. Also, some portfolios can be too diversified. This could mean that if a stock rises significantly, not enough of your money will be invested in it to see a considerable profit.

There are many different types of mutual funds to consider investing in. Money market funds are the safest. But because of the minimized risk, the rate of return on your investment will be lower as well. Another type of mutual fund is the bond/investment fund. These are your government bonds and corporate bonds. Bonds pay semi-annually, and most of the time the interest rate on a bond is fixed. So it’s easy to understand the rate of return on a bond – what your profit will be.

With equity funds, the mutual funds are invested in the stock market. So mutual funds that combine investing in the stock market, called equities, with those mutual funds that invest in bonds, called fixed-income bonds are called balanced funds.

Balanced funds could give you the best of both worlds. Equities are typically long-term investments, while bonds are shorter-term and pay regularly.

Similar to mutual funds is an exchange-traded fund. They are similar because investments are made by group of investors. However the major difference is that exchange-traded funds can be traded like stocks throughout the day as long as the market is open. You would still go through a broker for these trades but wouldn’t have to wait until the end of the day.

Exchange-traded funds follow a financial index such as the S&P 500. This means their value is not tied to the NAV like mutual funds. Exchange-traded funds can fluctuate in price throughout the day as the index fluctuates.

Exchange-traded funds have some advantages over mutual funds. The costs are typically lower for exchange-traded funds. Mutual funds are only traded at the end of the day, but exchange-traded funds can be traded at any time during the day so you can capitalize on investments that may have dropped in price for a period of but are expected to go back up – just like buying stocks on the stock market. Exchange-traded funds also have lower taxes than mutual funds.